Sunday, 9 August 2015

Who's Really Against Austerity?

It's increasingly clear that the key to political popularity these days is to tell anybody who'll listen that you're "anti-austerity" and that your opponents are "pro-austerity". It's quite simple really: we're being subjected to unnecessary hardship because [insert nemesis] is ideologically committed to austerity and causing unnecessary economic pain. The names of Paul Krugman and Joseph Stiglitz are normally mentioned; cue rapturous applause and soaring poll ratings.

Now the two Nobel Laureats cited above are undoubtedly hugely influential economic thinkers and staggeringly smart men - but I would suggest they are only peerless in their field when it comes to self-promotion. You don't need to believe you're smarter than them to observe that it's easy to build a popular following by telling people that they needn't be enduring the austerity being foisted on them by nasty politicians. That those nasty politicians have to prioritise actually running national economies ahead of selling popular books on economics and building their media profiles is by the by.

I'm not saying that Krugman and Stiglitz are wrong - I'm simply suggesting that they could well be wrong, that having a Nobel Prize does not confer infallibility.

If we were able to sit and discuss the question of austerity with either of these two eminent men, I'd like to think that they'd make nuanced arguments. Maybe they'd suggest that austerity isn't really a binary choice - it's not something that you either do or don't do - but that's its all about timing and degree. Maybe they'd sheepishly explain that part of their role is to gain headlines, fill column inches, boost their universities' profiles - to be box office. Maybe we'd discover some of their more simplistic (some say strident, some say patronising) pronouncements are simply a result of them playing to the gallery;

"I don’t know how many Britons realise the extent to which their economic debate has diverged from the rest of the western world – the extent to which the UK seems stuck on obsessions that have been mainly laughed out of the discourse elsewhere" - Paul Krugman

"Austerity has failed. But its defenders are willing to claim victory on the basis of the weakest possible evidence: the economy is no longer collapsing, so austerity must be working!" - Joseph Stiglitz

When it comes to the public debate they are in the enviable position of arguing against strategies currently being pursued - it's pretty easy for them to simply assert that whatever the current outcomes, it would have all been so much better if only more politicians had listened to them.

Fair enough. There's nothing wrong with lauded experts' forecasts occasionally being seen to be wrong (unless you're one of those who believe Nobel Prize winning economists are somehow meant to be infallible).

How does Krugman explain why economies pursuing the austerity he dismisses have been recovering? Take this example where he states that after imposing "harsh austerity" in 2010:

"... Prime Minister David Cameron’s government backed off, putting plans for further austerity on hold (but without admitting that it was doing any such thing)" -Krugman

Krugman is so passionately wedded to "austerity bad" (in a way that doesn't allow for any nuance around nature or degree of austerity being pursued) that the only way he can explain how unemployment has continued to fall and modest economic growth has been delivered is to suggest that we've not really been experiencing austerity after all. We went from "harsh austerity" (we'll come on to look at whether that was actually true) to no austerity at all. Who knew?

Of course the reality that Krugman himself is tacitly admitting to here is that austerity isn't as black-and-white a choice as his headline assertions would have us believe.

One of the problems is that it's not always clear what we mean when we talk about austerity. This isn't "just semantics" - it's important that we agree what a word means before we decide if we're for or against it. Let's take two definitions of "austerity";

"In economics, austerity is a set of policies with the aim of reducing government budget deficits. Austerity policies may include spending cuts, tax increases, or a mixture of both."- Wikipedia

"A lower standard of living associated with the curtailment of government spending" - Chambers Dictionary:

Of course the first of these defines austerity policies, the second describes the hardship that is one of the potential outcomes of some austerity policies. This semantic confusion is easily exploited in the world of sound-bite politics. It's as if we used the same word for surgery and pain: we're probably all against pain (other than the occasional masochist among us) but I'd suggest fewer of us are against surgery.

So let's agree that by "anti-austerity" we mean being against directly addressing the deficit through spending reductions and/or increases in taxation rates (the alternative being to increase expenditure and/or lower taxation rates in the hope that resultant economic growth will lead to higher tax revenues sufficient to cause indirect deficit reduction ... or I suppose if you're really blasé there's an option not to worry about deficit reduction at all).

If you accept this definition and think about it for even just a nano-second, it's clear that statements like "Anyone who understands macroeconomics knows that austerity is microeconomic theory that can't work" are nonsensical. The corollary of that argument would be that no spending level can be too high, no taxation level can ever be too low - that no matter what the deficit level you should never reduce spending levels or raise tax rates (because that would be the very definition of austerity and that "can't work").

As an aside; the quote above comes from a Twitter exchange with Richard Murphy of Tax Research UK. He often makes very useful contributions to taxation debates in particular - but in this instance he actually asserted that austerity was "deliberate sabotage of UK economy". He appears to be currently acting as Jeremy Corbyn's economic advisor. Quite incredible.
To be clear: I'm not championing "austerity" here, I'm merely suggesting that we have to look at the nature, scale and pace of austerity measures being introduced before we can form a view as to whether they are appropriate or not. I'm also not arguing that the way the austerity we have experienced in the UK has been delivered is "right" - I happen to believe that too much attention has been paid to reducing spend and not enough to raising taxes (as we'll come on to see), and that the spread of pain has fallen far too heavily on the poorest in society. This graph (created by the ever excellent IFS)illustrates the second of these points clearly - the people being squeezed down on are not the middle, they're the poor.

Twitter exchanges have taught me that people struggle to read this graph so I'll walk through it (assuming you've at least read the title).

From left to right we see the poorest in society across to the richest, broken into deciles (groups of 10%) - so the poorest 10% in our society are the left-most column, the richest 10% the right-most of the continuous sequence. The final column on its own on the right is the overall average.

The coloured bar elements sum to show the annual cash impact (the white line) of the tax and benefit reforms on individuals in each of these groups - so the poorest 10% loose £800, the next poorest 10% lose £1,300 ... whereas the richest 10% only lose £200 and the second-richest 10% actually gain nearly £200

The blue line shows the same thing but as a percent of net income (i.e. what proportion of "take-home" money is lost) using the right-hand scale - so the poorest 10% and next poorest 10% are about 7% worse off ... whereas the richest 10% are only 1% worse off and the second richest 10% are actually slightly better off.

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It strikes me the only way we can move away from the simplistic binary rhetoric of pro- and anti- austerity is to look at some actual data - what levels of austerity are we in the UK experiencing and how do these compare with other economic areas? If we're "anti-austerity" what precisely is it that we're against?

I've downloaded info from the Eurostat Annual Macro-economic Database (May 2015) and stuck to this single source (trusting that the EU's economists are better at compiling cross-country comparable economic data than this weary blogger). The data series they provide includes forecasts for 2015 and 2016 - for some reason they don't provide data prior to 2006 for "Euro area" or Greece. So be it.

The analytical approach I've chosen is to take 2006 as a base year for indexing purposes (i.e. the year before the current economic crisis kicked-off) and to look 10 years either-side so we can see the net effect of the financial crisis and austerity measures in context. It's an approach that has its pros and cons (choosing an arbitrary starting year is always slightly dodgy) but it gets us going, allows us to at least start asking some sensible questions. If you think of understanding the figures as peeling the onion, what follows is just the removal of the crusty brown outer layer.

Starting with government expenditure (excluding debt interest) in real terms and comparing the UK with the US and the Euro Area;

The surge in spending through 2007 - 2012 is due in part to government interventions to support the banks1 (the UK intervened earlier than the Euro Area) ... so presumably part of the subsequent apparent decrease would be due to these interventions not being repeated. The key here is that I think it's reasonable to compare our 100 index point of 2006 (before any interventions) to 2014 (after the main interventions) to get a sense of the underlying real terms increase in spending over that period. On that basis we can see that government spending in the UK and Euro Area is actually about 10% higher than pre-crisis levels and the US is on track to be 20% higher.

Now let's add to this graph some selected Euro Area countries to provide a little wider context - the scale of the financial intervention in Ireland of course stands out;

It's interesting to note that the only countries spending below pre-crisis levels are (of course) Greece and (just) Italy. The trend in UK spending is towards the bottom end of the range of other countries but is very similar (post 2006) to Germany and the Euro Area countries. Prior to 2006 it's clear the the UK's rate of government spending was increasing at a markedly faster rate than all but Ireland; France and in particular Germany have seen far smoother (but on average lower) spending growth over the period. The forecasts (when Eurostat published these figures in March) are for The UK to be the only country other than Greece to be reducing real spend.

As an aside: in the context of the Scottish FFA debate I've highlighted before that if you were to close the £8bn deficit gap through spending cuts that would require a 12% reduction in government spending. That would drop us somewhere between Italy and Greece on this graph - proof that it could be done I guess.
To what extent are these absolute expenditure trends supported by GDP growth? To understand this (and get a sense of the different government spending models) we can look at spending as percent of GDP;

It's no surprise that the US has a lower government spending model and it's clear their forecast spending increase is GDP growth driven (spend/GDP is actually slightly declining). The UK's model is to to spend slightly less of GDP than the Euro Area average - and the current trend is to further widen that gap.

So we've seen the spend side of austerity - now let's look at the taxation side. We're going to look here at the Tax Burden as percentage of GDP2 so we can see the extent to which tax has been used as austerity measure (again indexed to 2006);

It's striking that (relative to the starting point of 2006), the UK has been been reducing the tax burden overall whereas the Euro Area and the US have been increasing it. Oil revenue declines will be a contributing factor here but certainly doesn't explain this size of shift3; clearly something else is going on. Depending on your perspective you might see this as justified if it drives superior growth in the UK, or you might feel that increasing the overall tax burden is (potentially) a good way to make sure those with broader shoulders can take their share of the pain of austerity (and free economic capacity for spending driven growth).

Adding other countries to the graph simply reinforces this observation - the UK's is the only line heading downwards in recent years, the only country reducing our tax burden;

Here's a good point to pause and consider Krugman's comment about the "harsh austerity" implemented in the UK in 2010.I'd suggest you would measure "harshness" by either the steepness of either the increase in tax burden/GDP or the decrease in real expenditure - or possibly by the overall change in these measure from 2006 (pre-crisis) to now. On that basis I reckon Greece, Ireland and Spain have experienced far harsher cost side austerity than us and we've largely avoided tax side austerity (unlike Greece, Italy, France and - to a minor degree - Germany).Some of the poorest people in the UK have experienced austerity of course (per the earlier IFS "squeezed Poor" analysis) - but at a macro level it's hard to argue that the UK as a whole has experienced "harsh" austerity.
To complete the picture it makes sense to look at the tax burden as a percentage of GDP. As you would expect this is broadly the same profile as the spend/GDP graphs: the US economy is a low tax / low spend model; the Euro Area is (on average) a higher tax / higher spend model than the UK

You know the drill by now - we'll add other countries and you can pick your favourite;

So now we've got an actual data driven view of the alternative tax/spend and austerity models being pursued, let's see what macro outcomes are being delivered. We'll start with real GDP (again indexed to 2006);

The Euro Area has had it's double dip recession and is limping back towards growth; the UK is back to reasonable levels of growth; the US has been growing steadily now for 5 years. If what we've been experiencing is austerity, by this measure at least it's working. Of course we will never know what might have happened had we just kept spending ...

Let's add the other countries for the wider context;

It's clear that in terms of real GDP growth only the US and Germany (of our selected subset of countries) have done better than the UK since 2006 ... and if you look carefully you'll see that we've grown faster than all of these comparators except the US since 1996*. The scale of Greece, Italy and Spain's woes is clear, as is the extent to which they drag down the Euro Area.

*Addendum: looking again I see Ireland has actually grown significantly faster over the long period

Finally let's look at Deficit/GDP. This is simply an arithmetic function of all the figures we've just covered plus non tax-burden government revenues less debt interest4,5 (I'm too tired to graph these but trust me it all adds up - I'm careful like that);

On this important measure (below the line means the absolute debt is increasing), the UK and the US started from worse positions in 2006 and fell deeper than the Euro Area - but in all cases the deficit to GDP ratio is improving and (recognising the last two years are forecasts) the UK appears to be reducing its deficit at an accelerating rate. On this measure we are close to getting back to where we were before the crisis - although of course our debt burden now is much greater and the UK's deficit rate is still materially worse than that of the Euro Area.

One last time; let's crowd the graph up;

We weren't in a great place in 2006. The combination of cost-side austerity and GDP growth is slowly coming to our rescue but on latest actual numbers we still have a deficit of concerning magnitude (for reference the EU's "excessive deficit" threshold is 3%). It's possible that reducing the tax burden is at least in part the driver of higher GDP growth - but it's yet to be shown whether that will truly deliver in terms of deficit reduction.

Focusing on the UK: it seems to me there's room to be a bit more aggressive on overall taxation levels and certainly opportunities to spread some of the pain away from the poorest in society; in return it looks like we could let our belt out a notch on expenditure to drive economic growth through investment. Of course that - at its simplest - was the Labour Party's economic strategy going in to the last General Election.

Funnily enough it's also pretty much what the SNP's published economic strategy was too. Analysis by the IFS showed they basically matched Labour's more relaxed spending plans ...

... but (despite their cries of "social justice") were less willing to use tax increases as an economic lever.

Of course the SNP's rhetoric was that they were the only anti-austerity party6. The IFS showed - and anybody paying attention already knew - the easy sound-bites were not supported by published policies. So next time somebody tells you they're against austerity, maybe ask them what they actually mean by that.

It strikes me that being against austerity is like being against surgery: it's unpleasant, you only do it if you have to and there are a wide range of different procedures to choose from. Not all cuts are the same.

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Footnotes

1. As explained at least in part by Eurostat (Impact of support for financial institutions on government deficitsImpact of support for financial institutions on government deficits) bank capital injections were largely treated as "deficit increasing capital transfers (government expenditure)" and had a big impact on Euro Area Expenditure in 2010 and 2012 - these were calculated to increase Euro Area deficit by about 0.5% of GDP in each of those years and given spend/GDP is <50%, the direct
impact of the bailouts would only be about 2 index points on the Euro Area spending line. The impact in Ireland was much larger (20% of GDP in 2010) and was significant in Greece and Spain in (3 - 4%of GDP 2012).

2. This this makes up about 90% of the total government revenue for the UK and Euro Area, about 83% in the US.

3. Oil revenues went from 2.3% of UK revenue in 08-09 to 0.8% in 13-14 (per HMRC/GERS) so that would only explain roughly 1.5 points of index movement

4. It breaks down like this:

- Revenue/GDP = (Tax burden/GDP + other revenues/GDP*)

- Spend/GDP = (Spend.GDP + interest/GDP**)

- Deficit/GDP = Revenue/GDP - Spend/GDP

* In the UK these are fairly consistently about 4% or GDP, in the US 6-7% -- I've not dug into detail but I presume they include Gross Operating Surplus of state owned assets and proceeds from asset sales

"If we were able to sit and discuss the question of austerity with either of these two eminent men, I'd like to think that they'd make nuanced arguments. Maybe they'd suggest that austerity isn't really a binary choice - it's not something that you either do or don't do - but that's its all about timing and degree."

'How does Krugman explain why economies pursuing the austerity he dismisses have been recovering? Take this example where he states that after imposing "harsh austerity" in 2010:"... Prime Minister David Cameron’s government backed off, putting plans for further austerity on hold (but without admitting that it was doing any such thing)" '

My issue with this is that it comes across as though Krugman was backpeddlinga and made that statement without anything to back it up, when in fact there is evidence that after taking the country back into recession Osborne eased his austerity plans http://mainlymacro.blogspot.co.uk/2013/12/osbornes-plan-b.html

Haven't you hit the nail on the head in identifying why austerity has become such a hot political issue? It isn't so much the overall economic effect, but the fact that the measures taken have disproportionately affected the poorest in society. Cuts to benefits will have a relatively small effect on the numbers, but will be a disaster for those dependent upon them. Had the government made more use of tax, and targeted those most able to pay, "austerity" might be less controversial, notwithstanding the deleterious effect it would have had on the numbers voting for them.

As a regular reader and admirer of your blog, I hope you'll take this as information and constructive criticism rather than attack.I myself am entering the final months of my economics PhD, having started studying the subject in 2005 in sixth form. So as you can probably imagine, I've very closely followed the crisis and all the arguments about fiscal policy, etc. that have been brought to the fore during the course of my education in the subject. So here's my case:

Austerity has been a failed experiment, and those economists arguing for a change of course have been bang on the money. You point out a couple of prominent examples, Krugman and Stiglitz, to which I'd add Oxford's Simon Wren-Lewis, who has an excellent blog which I'd urge you to read if you get the time.This is by no means a minority view among the profession: I point you to a survey of prominent UK macroeconomists by the Centre for Macroeconomics.

There is a great deal of truth to the cliches about asking 10 economists and getting 10 different answers, etc., but not on this question. The reason for this is that this is basic, textbook macroeconomics. The poll fits with my anecdotes from speaking to, being lectured by, and attending seminars given by economists from a range of universities and institutions such as the treasury and civil service (economists from these institutions are interesting, because as civil servants they have to remain politically neutral).

Although what I'm saying is thoroughly mainstream in academic circles, I can understand your scepticism. One reason for this is because the arguments advanced for austerity have an obvious intuitive appeal: the necessity of belt-tightening, the analogies made with prudence in household or business finances (Osborne's 'nation's credit card' and Merkel's 'Swabian housewife'), etc. that will of course resonate especially with business people like yourself. I'm sure you're probably aware of the (correct) counterarguments to this; that this is essentually the fallacy of composition: an economy is not like a household because of the economy's spending can influence its income, even in the short term.

Another reason I can understand your scepticism is that, despite being utterly discredited in academic circles, austerity is still very much the received wisdom in the press and with the mainstream political parties. It's been a considerable source of anguish for me that my beloved Labour party, initially having earned much credit for their initial response to the crisis, slid after their 2010 defeat into accepting the false narrative that deficit reduction was the pressing concern. This article in the Royal Economic Society newsletter laments this fact, and the fact that Labour have been taking much less expert advice since 2010.

I'm currently reading a book by Yanis Varoufakis (a man with academic credentials himself), the outgoing Greek finance minister, who aptly describes the situation and concludes that, since in Europe the radical left are the only ones making economic sense right now, we should ally with them. He did that by serving in the Syriza government; in Spain, Podemos is the brainchild of a group of academics. I think other economists, including myself (not a natural radical by inclination) have been on the same path, and that's why you'll find e.g. Krugman and Wren-Lewis writing favourable things about Jeremy Corbyn. He'll be getting my vote.

My problem with 'austerity' is that is a word that fits an instinct rather than where the data leads us.

I am not an economist. However I do have some experience of looking outside the UK bubble, and from a USA perspective I notice a few things.

Firstly, the word 'austerity' is hardly if ever used in the USA. If you look for mentions by Obama, for example, you'll find only one example that refers to the US domestic economy (February 2 this year). This was 3 days after <a href="http://www.cnn.com/videos/tv/2015/01/31/exp-gps-obama-sot-greece-austerity.cnn>He questioned it in terms of Greece</a>. So let's not assume that 'austerity' is some well-established principle that is universally accepted.

The US didn't follow 'austerity' policy from 2008 to 2011, instead they had a 'stimulus' - the exact opposite. Only when the Republicans took control of Congress was spending lowered somewhat, through 'sequestration'. Even this was against Obama's will, and he has spent the last couple of years trying to unwind these cuts. You can see this clearly in your second graph - as the UK spending fell dramatically (2009 to 2011 as Labour first implemented some austerity then the Conservatives increased it) the USA spending went up during the stimulus period. Obama also increased taxes by letting the Bush era tax decreases expire.

So, one interesting question is, with the benefit of hindsight did stimulus beat austerity when it was practiced? Your 10th graph (Indexed Real GDP) seems to say that it did. From 2009, where you can see the US and UK very close, you can see the gap widen particularly around 2011 when the effect of the stimulus was at its peak against peak austerity in the UK. Or if you think the gap widening isn't significant, you could argue that the result was a wash. Even so, the continuous reduction in unemployment and introduction of social policies such as the expansion of free health care in the US means that the working and middle classes have at least had a better time over the last 7 years, without the need for 'austerity'.

My personal opinion is that austerity was a worse idea than stimulus, but since it hasn't ruined the economy, a return to growth has eventually happened like it always does. Maybe this is down to the Conservatives preaching austerity but not actually implementing it as much as they originally intended (see Rob's link above). I think it's a strawman argument to say that anti-austerity means 'that no matter what the deficit level you should never reduce spending levels or raise tax rates (because that would be the very definition of austerity and that "can't work")'. I would instead rather use the real example of the US stimulus and proceed from there.

Having said all of this, I have to give the caveat that the US has advantages over the UK. The dollar is the reserve currency, and US treasury bonds, despite being downgraded at the peak of spending, are still considered the safest investment possible. So the ideology of 'you have to spend within your means' may be good advice to an individual but doesn't mean quite the same to the US government that can print or borrow money as needed.

So I come back to my original point. Austerity isn't necessarily the only answer. The US certainly didn't follow it, and the US economy is now in better shape than the UK. This may not be conclusive but on the other hand, I don't recall Labour, Conservative or any of the parties even talking about this during the last election. Rather, they were tied to the notion that 'austerity' feels instinctively right. "You've spent too much in the past, you have to tighten your belt" sounds sensible, except it doesn't appear to be true. It also helped the Conservatives blame Labour for a whole bunch of things that wasn't their fault.

As other commenters have said, you have severely mischaracterised the arguments made by Paul Krugman and the other Keynesian economists, (possibly even the majority of academic economists?). Their arguments are a lot more nuanced than your crass oversimplification of their views. They do not argue that government should never make spending cuts or raise taxes, just that it should be done after you have the economy firing on all cylinders, which currently it is not.

As to your own arguments they seem pretty muddled to me, and festooning them with graphs, which you patronisingly tell us we are probably too stupid to understand, does not make them more plausible.

The problem you have in this post is that you get mixed up between the shouty "anti austerity" movement and what Krugman actually says. In the current climate of political debate, this is like comparing the complex statistical analysis in a medical paper with the Daily Mail headline of "Chocolate Causes Cancer" that it produced. One is full of caveats and subtle argument and the other, well......its the Daily Mail. The level of debate has been poor on both sides of the argument though, and the lack of nuance can be stunningly depressing

If we were able to sit and discuss the question of austerity with either of these two eminent men, I'd like to think that they'd make nuanced arguments.

This is perhaps the oddest comment I can imagine from a blogger. That is the point of blogging Kevin! Given that you are someone who blogs to correct, for instance, a soundbite laden discussion with the likes of BfS, I thought you would appreciate that. You don't need to sit down and discuss to get the nuanced arguments with Krugman, you could read Krugman's blog. In this, on a daily basis you will find a (sometimes wonkish) discussion on the relative benefits of fiscal and monetary policy, and when and where each of these can be effective. Key point made over many years now, fiscal policy to expand the economy can be effective in the current climate with interests and zero lower bound and a deficient demand scenario. So when you say "no spending level can be too high, no taxation level can ever be too low", you do entirely miss the point that Krugman has been making over those years.

The graphs presented largely miss the point. The austerity we are talking about here is really about the speed at which you close the deficit gap and how this speed affects the overall economy. The fact that Osborne reduced this rate is well documented, by the OBR among others. As Rob says, try reading the Mainly Macro blog - and not just the link provided. Read it on a regular basis and you will get a decent idea of what the debate (outside the media and shouty politics bubble) is really about.

Also, forget about comparing the UK with Greece or Ireland. If we learnt anything from the Indy Scot Currency / FFA debate, it is that fiscal policy in a currency union is in a very different place from fiscal policy in a large economy with its own currency. Krugman himself has done some rather good posts explaining that difference, but that is another matter.

The UK has had one of the slowest recoveries from a recession in it's history. Debate if you want how changes in the level of the deficit could have altered the path of that recovery, but do it from that key starting point.

I'd just add, seeing that the first part of your post deals with austerity still to come, that the tax burden as a percentage of GDP is forecast to rise over the next few years.

Currently we are at 35.7% and this is forecast to rise to 36.8%. These levels are at near 50 year highs for the UK, and were only surpassed (somewhat surprisingly to most people I'd guess) by the early Thatcher years of the 1980s.

However these are just forecasts based on Osborne's latest budget, and one assumes that tax cuts will feature in the future. But then so might cuts to cost-side austerity too.

And in what way is the economy not "firing on all cylinders" now ? (whatever that phrase means, and it certainly doesn't sound very "nuanced"). Record high employment rate, economy growing at trend rate, low inflation and interest rates. If you can't pare back spending now when does the nuanced Krugman ever think you can cut spending (only at the peak of an overheating boom ?)

Firstly, while I take on board your graphs early in this post relating to the effect of benefit cuts, the government would argue that a) the cuts are necessary to try and balance the books, b) that saying benefit cuts hit the poor hardest is a bit of a durr! moment and c) that it's misleading to talk merely of benefits in a context where the economy is growing and HMG has announced a minimum wage significantly above what many people are currently earning.

The Tories are trying to engineer a situation where being in work pays but being on benefits is unpleasant. You may not agree with this, but it is at any rate a defensible position.

Secondly, I think you might have stressed more that government spending is continuing to grow. It is of course fatuous to say we have austerity in that context.

Thirdly, you must have been knackered when you posted, because it could do with a quick proof read for typos and omissions, particularly towards the end!

Many of these comments point out that I over-simplify the academics stance here - I accept that (and allude to it in my "I'd like to think if you sat down and chatted ..." section).

The point is that the wider public debate (the headlines, the twitter spats, the political soundbites) are based on gross simplifications of their arguments and I'm challenging those perceptions more than their learned academic theses.

If anybody doubts my point I direct you back to the comments (and linked Twitter exchange) from Richard Murphy and the gap between SNP rhetoric and action.

I'm targeting people who are "against austerity" without really knowing what they mean when they say that. I'm suggesting it helps the debate to consider the different ways "austerity" might be delivered (degree and type of cost cuts, scale and targets for tax increases) and that we should check the actual data before leaping to simple knee-jerk "austerity is bad" conclusions.

This is a piece of open-thinking and data exploration - I hardly come out of it championing current policy makers, I'm merely attempting an objective rational assessment based on the data I have found time to crunch.

The "straw men" you refer to are put there by the likes of Richard Murphy (see the direct quotes and Twitter exchange link) - I'm addressing the simplified sound-bite arguments that dominate political discourse (see SNP)

Yes - that's clear in the graphs (slight up-tick in spend/GDP in 2012) - but in 2013 & 2014 spending was being reduced so surely that's still austerity by definition? That's kind of my point - it's not binary.

Helpful and informative thank you - I think this blog works best when it effectively crowd-sources opinion and perspectives.

Re the "straw man" point - I'd suggest that is precisely the argument that Richard Murphy used and defended on Twitter (see the links) and is also the argument used by the SNP. So if it is a straw man it's not one created by me

1. I'm addressing the simplified version of their arguments as used in general debate - that this is a crass simplification I nod towards with the "If we were to sit down and chat..." Paragraph

See the Richard Murphy (Corbyn's advisor) and SNP quotes if you doubt that some argue that simplistically.

As for being patronising - I'm sure for you it is, you can skip those bits where I walk through how to read graphs. I'm writing for a wide audience and Twitter debates have taught me that not everybody is as comfortable interpreting graphs as you and I are.

But you imply the graphs are somehow implausible - which ones do you dispute?

I'd suggest the point is I'm reacting to the shouty debate which often misuses the academics names as being "on their side" - my "if we could sit and chat..." paragraph was attempting to make that point (perhaps not very well I accept)

Re "debate from that starting point" - I'm very clear that I have jumped in using one set of EUrostat data and the analysis (any such analysis) is clearly condition by the approach taken. It's just the crusty brown outer layer of an onion, I don't claim it's the fully cooked stew :-)

Fair point - as I said I've stuck with Eurostat figures for the macro comparisons and the actual and two year forecasts (as opposed to IFS longer term and therefore inevitably more uncertain forecasts) show the tax burden remaining well below recent historical highs

You sound like Danny Blanchflower who always manages to tweek out the worst possible conclusion based on the latest piece of economic data.

Unemployment has been falling sharply over the last few years. The employment rate is at record highs. Vacancies are at record highs. Wages are growing at 2.8% annually which in a zero inflation scenario is a huge boost to household finances. Employment surveys all show that these trends will continue an dthat the recent slight rise in unemployment is due to those previously put off ever looking for a job rejoining the jobs market.

As for confidence both business and consumer confidence have been at record highs. Current readings are consistent with trend plus rates of GDP growth.

As I said earlier it does sound as if the only time you would ever consider any cutback in government spending is at the top of an overheating boom. So 95% of the time you would be running an expansionary fiscal policy regardless of the impact on the the nation's finances.

Good stuff, and well written, despite the slow-to-digest bits that are perhaps inevitable.

Personally, I think you're a bit more scathing towards the Laureates (with an e?!) than they deserve. I take the point of your irritation - career-successful pontificators who don't need to get their own hands dirty, might perhaps sum it up? - but despite the fact that from what I've seen, they do abstract-categorise a bit more than desirable, I take one of the two points of Krugman's attack to be waht you illustrate in yr Figure 1, and close with in your pithy final sentence.

Socially unfair measures, that not only overburden but demotivate the bottom 1/2 to 2/3 of society.

If the Coalition, then Conservative govt HAD used progressive taxation a bit more - and invested in public works as a secondary "arm" - i doubt the two reprobates you take to task would have raised their voices nearly so high.

There are other details - "buying" banks puts a strain on the economy, "selling them" (I simplify) creates a bonus for the state's balances and PR-wise for the government able to flog that part of the stake ..... but this is to start to go into details I don't want to bother you with here!

You've started from view point that anti-austerity economics "could" be wrong (could in quotes, as you all but explicitly state it is through your ad hominem against two of its proponents). Then, mysteriously, all the figures you present show it is. Meanwhile, a bunch of other figures that show it isn't wrong are left out. If you haven't got time to look at those figures, then there's no point in pretending what you're presenting is in anyway useful.

Hilariously, you actually go on to make the same argument made by Stiglitz, whom you quote (and mock) at the top of the post.

"But its defenders are willing to claim victory on the basis of the weakest possible evidence: the economy is no longer collapsing, so austerity must be working"

"The Euro Area has had it's double dip recession and is limping back towards growth; the UK is back to reasonable levels of growth; the US has been growing steadily now for 5 years. If what we've been experiencing is austerity, by this measure at least it's working."

No mention, however, of the fact UK GDP per capita is still below its pre-recession peak. Recovery? What recovery?

Then there's Spain, Italy and Greece, the three nations that have undertaken the harshest austerity measures in Europe. You acknowledge their economies continue to fail, yet seem to treat them as outliers and even hint that their struggles some how prove your point that austerity isn't bad - "The scale of Greece, Italy and Spain's woes is clear, as is the extent to which they drag down the Euro Area."

Funny that the three countries where austerity is most extreme show the worst economic performance. Probably just a coincidence.

Anyway, I hope you enjoy the looming return to recession as much as I won't.

I couldn't be clearer about the fact that I'm simply crunching the numbers from that one Eurostat source (they don't give per capita data in the data set I downloaded) and there's nothing "mysterious" about the graphs - the data is what the data is and I present it so you can read the graphs and think for yourself.

That this blog doesn't contain *everything* that matters is self-evident (I provide no data on interest rates, employment, per capita figures, capital vs revenue expenditure, expenditure by category, tax by type etc.). This is something I do for fun - because each blog post can't be a complete phd thesis doesn't mean there's no point writing them. Look at the debate that this has triggered if you doubt that.

"Hilariously" the fact that I make the Stiglitz argument is exactly the point - I'm looking at it objectively and forming a view - what I'm against is meaningless, undefined "anti austerity" rhetoric. I'm clear that on deficit/GDP the jury is out and I think the current obsession with cutting the tax burden whilst cutting spending does seem rather strange in context. People who like you who aggressively fly off on one if they think somebody is refusing to simply accept "austerity is bad" before actually questioning what that could actually mean - you cause the problem I'm patiently trying to nibble away at.

What's hilarious is that your "confirmation bias" is so anti-austerity that you find somebody daring to ask what that actually means (and carefully avoiding drawing black & white conclusions on extremely limited contextual analysis) so deeply upsetting to you.

I don't think you get the difference between trenchant opinion blogs (which I sometimes write) and more open "help me think" blogs like this one. Even heavily insulting comments like yours contain snippets that help me think through the issues whether you realise it or not.

As for suggesting that I am dismissing the Greece, Italy & Spain examples - by presenting them and highlighting them - well frankly I fucking despair.

I am thinking out-loud and sharing elements of analysis that I've done so that others can join in the discussion and engage in an open-minded thought process. You don't seem interested in that - so either direct me to your own *complete* analysis or offer constructive comments (as many others have).

The data you present makes a great case against austerity. You describe Greece, Ireland and Spain as having harsher austerity than the UK on an expenditure basis, and Greece, Italy and France as having harsher tax-side austerity. Of these 5 countries, they all have recovered more slowly than us. The only country which can be fairly unambiguously considered to have had less austerity than us is the US, which is the best performing in terms of growth. If you're looking for an indication of what austerity does to economic output, this is pretty clearly shows the negative effect.

And it is not hard to understand why. Its textbook macroeconomics. Government spending adds to GDP - by the very definition of GDP (Y = C + G + ...) - in the same way everyone's spending does. Remove spending and you cut GDP. So not only the empirical evidence is against austerity, the elementary theory explains it easily.

So given that policies of austerity demonstrably have a harmful effect on economies, I think it is pretty reasonable to state that the growth we've had in the past few years is *despite* the government's (comparatively mild) policies of austerity rather than *because* of them. If we care about economic productivity, being anti austerity is an objective position based on empirical data.

Would the deficit be worse with less austerity? If we stick to the data, then the deficit/GDP data you present shows that the US, the one country with less austerity and more growth, reduced its deficit at at least the same rate as us (arguably a smidgin faster). So even for the primary pretext for austerity the jury is out.

You state that: "it's unpleasant, you only do it if you have to ...". The UK didn't have to. The pretext was that the deficit was too big and that the government would run out of money or something. The idea of a sovereign-currency issuing government running out of money is, of course, laughable and the suggestion that we should harm the economy for sake of balancing such a government's "books" is like Sainsbury's burning their stock because they're worried about running out of Nectar Points. We were told the markets would stop buying our debt. The debt doubled and the yields didn't rise but fell. The ratings agencies downgraded us, and still the markets bought our debt. The markets know that a currency-issuing government cannot default and so the debt of the UK and US (unlike the Eurozone) is highly sought after as a safe investment. And the central bank can always print £375B to buy up its own debt, maintaining the demand and low cost, and call it something fancy like Quantitative Easing. The government finances were never in crisis. Unlike the Eurozone governments, our central bank equips us with the tools to accommodate a large deficit. And if the US is anything to go by, the deficit would have fixed itself anyway.

The other laughable thing about the deficit hysteria is that it is not even clear that the government can control the deficit. The deficit is an *outcome* which depends on the economy. Again, an elementary macroeconomic identity is that the government budget deficit equals the trade deficit plus savings (net of investment). The deficit is determined by the spending and savings decisions of the private sector. This is why it increases during a recession when saving goes up, and why Germany has the smallest deficit ratio in your plot - they have a trade surplus. The Coalition government tried to cut the deficit of a country with a trade deficit in an embryonic recovery from a recession. It is this context that the austerity should be judged. If expenditures are less than they need to be to accommodate the savings and trade desires of the private sector then this will cause economic output to drop.

Thanks Spatchcok - a great comment which I will read more carefully tomorrow. The only immediate thought I have is that you appear to focus on GDP growth and not worry about deficit:GDP (hence debt:GDP obviously) where the UK is currently still languishing. That's not to argue therefore I think more severe austerity should have been applied or that what was applied worked - just that it's a consideration and on that measure (right now) we are doing worse that the "severe austerity" cases. Too tired to digest all your comment tonight will read fresh tomorrow

"The point is that the wider public debate (the headlines, the twitter spats, the political soundbites) are based on gross simplifications of their arguments and I'm challenging those perceptions more than their learned academic theses."

I think it's fair to say that this statement could apply to countless topics of discourse within the UK over the last few years (particularly within Scotland).

1. UK can handle a high deficit (and debt) because it has a central bank, can devalue, set interest rates, never default (which the market knows) and buy its own debt. There was never a crisis of finances as the Tories told us. So the deficit and debt are not problems in the way we are told.

2. The deficit should not be seen as something to target for its own sake. Like I argued, it is an outcome of the dynamics of the economy - specifically the private sector propensity to save and net import. When the private sector chooses to save and/or net import (basically foreign held savings), the government recycles these savings back into the economy by exchanging them for bonds and spending. This is what we call the deficit. If the government didn't do that, saving and net importing would cause a recession. Targeting a balanced budget or a surplus at some specific point in the future, irrespective of what the economy might be doing in terms of private savings and the trade balance at that time, is daft. And equally, viewing deficit reduction as some kind of virtue in and of itself is not really appropriate in my view for the same reason. The deficit should simply be what it is, and we should not care about it. It's worth mentioning that the US and UK governments are *always* in deficit - the books are never balanced (http://www.rationalintuition.net/2015/05/the-deficit-puzzle-are-government.html) over the long term. The *average* post war deficit in the UK is 2.4% GDP. And this is because private and foreign sector savings (in the government's currency) are continually growing. We call these savings the "government debt". If we really want to care about the deficit, we should aim to have a trade surplus like Germany. They can balance the governments book because the income from net exporting plus the gap caused by domestic saving. Or discourage saving?!

So I don't see that we're doing worse on the deficit front than the more extreme austerity cases when they have smaller deficits. In fact I'd see it the other way around. They are doing badly because they are not allowing their deficit to recycle lost money back into the domestic economies. I say "not allowing" - of course it is the institutional structure of the Eurozone that is imposing this.

To determine whether growth was "despite" or "because" of the government's austerity policies you would have to determine what impact this austerity had on long term interest rates and the level of sterling (which directly impacts imported inflation and thus household income) and whether the boost (if any) from this outweighs the direct contractionary effect of lower government spending.

Needless to say determining this with any accuracy (and an even 5bp change in long term interest rates has a significant impact on a £1.5trn economy) is next to impossible. Hence the continued debate over austerity economics.

I get the arguments about increased Govt spending to fuel growth - I think it's pretty obvious. But to me that argument - in the context of the current UK economy at least - seems to ignore that increased Govt expenditure doesn't create anything we can export, so does it actually make us poorer in the long term (because we'll just, on balance, buy more foreign-made stuff with it)? This is the difficulty I have with the idea of Govt stimulus in an economy that is already in a long term unsustainable position balance-of-trade-wise. The concept of anti-austerity (whatever it means!) feels like feeding a heroin addiction with more heroin (I.e. It deepens an existing dependence on public spending of an unproductive nature).

Of course if by anti-austerity we meant investment in industry/stuff or services we could sell, maybe I could accept that more easily, at least in its theoretical benefit. But if we just mean a short term shot in the arm to an economic set-up that is fundamentally unsustainable, I think I'd like us to go cold turkey.

The arguments over whether growth is despite/because of austerity just seems a bit weird really - if we are growing without the added stimulus that many evidently advocate, why do we need extra Govt spending (for the specific goal of growth)? By that rationale would we not need stimulus at all times because growth would be lower without it?

Ultimately, I just want our Govt/s to act sustainably because that is what's best for the most vulnerable in tomorrow's society even if it's harsh for today's. But as to what the right balance is....

"The *possibly because* I was pondering was reduced tax burden rather than cost side austerity (I fully get the logic on reduced spending necessarily hindering GDP)"

You can easily cut through the ambiguity of whether it is spending-driven or tax driven austerity by just looking at their difference - the deficit. If a country's deficit is getting bigger it is providing a "stimulus", if it is getting smaller it is becoming more "austere".

When you look at the deficit ratio plots there is quite a bit of noise in that some Eurozone counties have some quite wild fluctuations in the deficit (e.g. Ireland, Greece). But looking at the Eurozone as a whole we see that the deficits were generally smaller that the US and UK over the period following the crisis. Which just brings us back to what I was arguing earlier that these countries were more austere and grew slower.

How do you think the austerity affected interest rates? I am not sure what mechanism that would be.

I suppose my argument is we have our own central bank and currency and can set our own base rates. The Bank printed £375B (QE) in order to keep rates at the floor. That's why we're in a better position than the Eurozone - because we have more tools to balance our economy (including running larger deficits).

The government needs to stimulate the economy precisely *because* we have a trade deficit. When the private sector chooses to buy from abroad that reduces demand in the domestic economy. It means that some of the income earned in the domestic economy in, say, 1 year, is not recirculating in the domestic economy in the next, and incomes therefore drop. Something has to fill that spending gap if incomes (i.e. GDP) is going to remain at the same level (let alone grow). It is exactly the same with domestic savings. When you stick money into your pension it is earned income now held out of circulation - not re-spent providing an income for the next person. So domestic saving and net importing are both drags on the economy. The government spends that money back into the economy - we call it the deficit - and this maintains demand/spending/incomes. And as savings grow through time, so does the government debt because it is simply the record of money saved out of circulation. It is no surprise that pension funds are one of the main holders of UK government bonds. They're are our savings.

"By that rationale would we not need stimulus at all times because growth would be lower without it? "

Yes, exactly. Have you seen the long term budget position of the UK (or US)? I plotted it out here: http://www.rationalintuition.net/2015/05/the-deficit-puzzle-are-government.html. The government - bar a few short periods - is *always* in deficit, in good times and bad, under Tory and Labour governments. The books are never balanced. And the cumulative deficit vastly outweights any cumulative surplus over time - otherwise there'd be no debt. And the reason is what I outlined above - without it, domestic savings and net imports would drag the economy down. If the public change their saving and importing habits, then this situation might change (e.g. Germany), but the deficit is simply an outcome determined by these private sector habits, not something the government chooses. So it is not really that the government stimulus is arbitrarily adding to growth of a perfectly functioning economy, it is compensating for inherent drags.

So let's agree that by "anti-austerity" we mean being against directly addressing the deficit through spending reductions and/or increases in taxation rates (the alternative being to increase expenditure and/or lower taxation rates in the hope that resultant economic growth will lead to higher tax revenues sufficient to cause indirect deficit reduction

My initial reaction was that you were using the word austerity without defining it or examining how it is used; you deal with this in this paragraph but you again are saying that Krugman is saying something that I don't think he is.

By using the definition of austerity that includes tax increases to reduce benefits as well as curtailing government spending to reduce benefits, you are saying that Krugman is against these things. I don't think that is the case at all. Krugman is against cutting goverment spending, but he is not against increasing taxes, so far as I understand.

How the word'austerity' is used in the UK is almost soley to refer to Osborne's plan to cut the deficit by reducing government spending and increasing the tax burden on the poor. By your definition, increasing the tax burden on the rich and collecting uncollected taxes also count as 'austerity', but it doesn't in most other people's definitions. So I can't even read this piece for the ellision of the meaning of the word austerity.

Your definition of the word 'austerity' leads to this paragraph:

The corollary of that argument would be that no spending level can be too high, no taxation level can ever be too low - that no matter what the deficit level you should never reduce spending levels or raise tax rates (because that would be the very definition of austerity and that "can't work").

AGain, you are saying something that people aren't saying, simply because you have put meaning into the word austerity that is not there for most people. In fact, you have included in the meaning of the word austerity what is actually, by many people, meant by the words anti-austerity.

Thus my complaint on twitter that you were saying that people were saying something that they aren't.

As it happens, I agree iwth the idea that taxes should go up in order to promote growth and what you say in this paragraph:

Focusing on the UK: it seems to me there's room to be a bit more aggressive on overall taxation levels and certainly opportunities to spread some of the pain away from the poorest in society; in return it looks like we could let our belt out a notch on expenditure to drive economic growth through investment. Of course that - at its simplest - was the Labour Party's economic strategy going in to the last General Election.

But again, I think that this is what people mean by anti-austerity; it's simply that it falls within your definition of austerity.

What I do know is that Corbyn is committed to bringing the deficit down - which is essentially your definition of austerity - but by raising taxes and reducing the burden on the poorest. Happy faces all round!

I am not sure that blogs about the semantics of "anti-austerity" is going to cut much ice with the SNP or that part of the Scottish population disposed to support them. We all know that the SNP's "anti-austerity" position is simply a cynical ploy to differentiate themselves from those dreadful "Tooriees". The reality is that the SNP is officially wedded to a position in which they gain independence for Scotland at the cost of Barnett money. Any party that is prepared willingly to give up a line item of about £8 billion a year or 12% of Government revenues in return for the nebulous economic benefits of independence cannot conceivably be "anti-austerity". Rather, it is buying independence with an eye-watering austerity. This was not as obvious, perhaps, at the time of the Independence Referendum, when Salmond could lean casually on a lectern and talk of the trillions of pounds that was going to flow to Scotland from oil when independence was gained. And for a few months after the referendum, there remained the hope that oil prices would pick up after a short sharp dip. But it is now clear that US$50 a barrel is probably here to stay for some time, way below the level needed to make any money for Scotland. The Saudi's have failed to break the US fracking industry, and Saudi Arabia and Russia are now in deep financial trouble. An independent Scotland is therefore facing no rescue from its oil industry. It might even be picking up large decommissioning costs in the form of foregone tax from the little tax income it might have enjoyed. Meanwhile, as Jim Cuthbert has shown, Scotland is going to suffer a progressive decline in Barnett income even without independence (The Barnett formula under the Smith Reforms, Fraser of Allander Institute Economic Commentary, Vol. 39, No. 1, pp. 98-111). No wonder a new Scottish Independence party has got going, because the scuttlebutt going round Edinburgh must surely be that the SNP hasn't got the gall to inflict the vicious austerity that is the true price of independence. By giving up the pretence of independence, the SNP might conceivably pass itself of anti-austerity. Mind you, if it keeps up its madcap tilts at things such as GM crops and fracking, it will soon have created a new way of creating the austerity it so despises.

"It's clear that in terms of real GDP growth only the US and Germany (of our selected subset of countries) have done better than the UK since 2006 ... and if you look carefully you'll see that we've grown faster than all of these comparators except the US since 1996*"

Kevin,

Don't forget that the US economy has benefitted massively from cheap energy, the by product of the shale oil/gas / fracking industry.

Many manufacturing firms there have found themselves more competitive than before this boom, so a direct comparison with their amount of 'austerity' might be difficult.

Back in April I received a leaflet through the door from my local TUSC candidate, which read:

"Austerity means making the working class pay for the greed of the bankers and the billionaires."

Hmm, no it doesn’t. That’s just one example of austere policy. One could equally protect the working class and make the bankers and billionaires pay, and call it ‘austerity.

But it was around about this time that the since-elected SNP candidate Natalie McGarry, perhaps unwittingly (though I’ll give her the benefit of the doubt) gave the game away: "I would be happy to take a wee bit more austerity if we can protect the poorest." It was a very refreshing, and very un-SNP thing to say but it gave me hope that we may be getting beyond all the spin and the bluff and getting closer to an understanding of what ‘austerity’ is, to what extent it is necessary and how best to implement it.